Cheap Auto Loans Choking Israeli Roads with New Cars

Low-interest rates lure Israelis to banks for financing, enabling them to buy a record 300,000 cars this year

The next time you’re stuck in traffic, don’t think it’s because of construction work or an accident. It could because of your bank.

In Israel it is recorded a record low interest rates and the obtainability of auto finance up to 100% of the purchase price has tempted Israelis into purchasing new cars at record rates.

If the purchasing rampage continues at its current pace, over 3,00,000 new cars will be added to the country’s already crowded roads in 2016. That is up from 254,000 previous year and fewer than 205,000 in 2012, according to figures from the Israel Auto Importers Association.

The banks can’t be responsible for all the increased purchasing. Sales of new vehicles increased 40% than the past 3 years, while the number of Auto loans prolonged by banks rose by a more moderate 15%. Many in the auto industry states the official figure minimizes the true extent of bank lending for new cars.

“The banks don’t really know how much money they issue for car loans because not all loans are marked as such,” stated one auto industry source, who asked not to be known. “Anyone can get a substantial loan for whatever purpose with collateral, and often the auto loans are used to buy a car.”

As of the end of June, lending for new cars by banks and their linked credit card companies total to 9.7 billion shekels ($2.52 billion). It was for the first time such a figure has been published, as the Bank of Israel directed lenders to break out their auto financing from other consumer loans starting with their 2016 financial reports.

Banks accounted for 7.3 billion shekels of the Auto loans, a figure that rose 1 billion shekels in the past 3 years. Credit-card companies represent for the remaining 1.9 billion shekels.

An examination by TheMarker establishes that Bank Leumi is the dominant player. The bank has 3.3 billion shekels of auto loans on its books, compared to 2.6 billion shekels for Bank Hapoalim, its bigger rival. In addition, Leumi’s Leumi Card unit has made additional 1.275 billion shekels in car loans, bringing the group’s total exposure to 4.5 billion shekels.

The terms banks and credit-card companies offer on car loans for customers is tempting. Banking courses stated that consumers can easily get loans for 70 to 100% of a new car’s value for term of 2 to 4 years at rates of prime plus 0.5 to 2.5% points.

Monthly outlays can be as low as a few hundred shekels, although many borrowers take out balloon loans that require a huge final payment at the end of the loan term. Many car importers have deals with banks to provide buyers with loans.

From the financiers’ point of view, the risk with car loans is higher than, for example, property loans because the value of a car falls rapidly after it’s purchased. Moreover, the margin lenders earn on car loans is a narrower 1.5 points to 2.5 points, versus 4 to 5 points for general-purpose consumer loans.

Several course stated lenders could be fueling a car bubble and actually the Bank of Israel asked for a breakout of car loan data out of concern over the banking groups’ coverage. Auto loans account for just 6 Percentage of overall consumer lending for the groups, but at Leumi Card it is 14%.

Banks states they are assured about the market and point to a default rate of just 0.25%, compared with 1.25% to 1.5% for general-purpose consumer loans.